In Kenya not all that glitters is property !

PKM2

Slide 1PKM2 Patrick Kiragu Mwangi, 24/04/2016

As an investor in Kenya you would be forgiven for overestimating the returns on property given the demand for housing that has existed in the market for decades and appears to have no end in sight.However, a deeper look at the investment space involving the whole range of asset classes- from shares, bonds, property and a simple fixed deposit account (cash) reveals rather interesting results.

Taking the NSE-All share index performance over the period 2009 – 2015 as a proxy for equity investing and mapping this on both the performances of the Nairobi property index (as a proxy for property investment) and a ‘naïve’ fixed deposit account (as a proxy for cash investment) reveals that not all that glitters is property.

The return profiles of the three asset classes are demonstrated in the graph below. They reveal a superior return from a fixed deposit account compared to property or equity over the same time horizon.

However, transactions costs as well as tax costs have been ignored.

Are you better off in Property?

0

50

100

150

200

250

Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015

Average price movements (2009 -2015)House Price Index (Nairobi Property Prices) Share Price Index (NSE All-share index) Fixed Deposit (Cash) Index

Source: Hass Consult, 2016; myStocks!, 2016

Caveats The higher end of the Fixed deposit interest rate range of 7% - 13% for 7 days – 3 years has been assumed, namely 13% A 15% withholding tax is payable on interest receipts. KES 100,000 at 13% interest would earn net KES 11,050. Capital gains tax on sale of shares is non-existent from 1 January 2016 Banks are unwilling to commit to higher returns over a long period due to changing market forces. Account will also incur:

opening charges monthly maintenance fees, and ledger fees

Cancellation fees are payable on early withdrawal (i.e before maturity date) Interest is payable only on maturity A minimum a/c balance- KES 50,000 must be held

Fixed deposits